MainStay Mutual Fund Enjoying Big Rally, With Stocks Like Alibaba

After a ho-hum 2016, $12.1 billion MainStay Large Cap Growth Fund (MLAAX) is having a hi-ho 2017. The fund's 2.62% setback last year badly lagged the S&P 500's 11.96% gain. It trailed 90% of its large-cap growth peers tracked by Morningstar Inc. But its 21.24% gain this year going into Thursday more than doubled the big-cap bogey's 10.32% return and trumped 89% of its direct rivals.

XAutoplay: On | OffThe fund's rally reflects the market's shift away from defensive, low-growth staples-providers and higher-dividend stocks, which dominated for much of last year, to the sort of higher growth stocks that the fund favors. Fund co-manager Patrick Burton — on this job since early 2013 — says leading technology stocks in particular have been buoyed by market-share gains and strong earnings. Burton and lead manager Justin Kelly are with subadvisor Winslow Capital.

Reflecting that market tilt, the fund has been boosted this year by such holdings as Alibaba Group (BABA), which is up 66%. The fund also holds graphics chipmaker Nvidia (NVDA), which is up 46% this year. Digital-media and marketing-software firm Adobe Systems (ADBE) is up 39%. Biomed Celgene (CELG), which is up 14%, is a fast grower in health care.

"Alibaba is the No. 1 player in e-commerce in China," Burton said. It is benefiting from the shift to mobile devices. Gross sales are still growing rapidly despite its size. And Alibaba Cloud, like Amazon Web Services, is growing very fast, he says.

Nvidia is benefiting from a shift toward the use of graphics processing units (GPU), away from regular CPU computer chips, because of their faster processing speeds in applications such as artificial intelligence and self-driving cars, Burton says.

Adobe is shifting from selling software licenses to annual subscriptions. "Customers churn less and buy more" under that model, Burton says.

Celgene stock is up due to a combination of decent earnings and attractive valuation "since biotech has been under pressure for a couple of years," Burton said.

Three Buckets

Over the past 10 years, the fund's 8.18% average annual gain topped 72% of its rivals. Winslow's Kelly has been at the helm since late 2005.

The fund aims to navigate through various market phases by adjusting its allocations among three types of growth stocks.

One bucket holds stocks that the managers see as long-term, sustainable earnings growers. The second bucket holds quality cyclical growers, which may be more volatile. And the third holds stocks in newer industries with rapid growth.

Skyworks Seeks New Markets

Skyworks Solutions (SWKS) is one of the fund's cyclicals. They supply radio frequency filters for Apple (AAPL), Samsung and Chinese cellphones. "What's changing is that they are moving into other products that need wireless applications like Tesla (TSLA) (cars)," Burton said. "They are pushing to get involved in the internet of things."

ServiceNow (NOW) is a new-industry stock, which is expanding from IT management for clients into new areas like cybersecurity and human resources.

Celgene Is A Leader

Celgene, whose cancer drug Revlimid is its flagship, is ranked No. 1 in IBD's Medical-Biomed/Biotech industry group. The group is ranked No. 8 among 197.

Wall Street expects earnings per share to climb 23% this year. Pretax margin last year of 50.4% was its highest in at least nine years.

IBD'S TAKE:You can check out more of Celgene's fundamental and technical strengths in IBD's easy-to-use Stock Checkup tool.

Illumina (ILMN) and Netflix (NFLX) were new additions to the fund's portfolio in the second quarter.

Illumina is a leader in low-cost gene-sequencing equipment. Burton said, "We believe Illumina will demonstrate an accelerating growth profile over the course of this year and next, driven by the launch of its new gene-sequencing instrument, Novaseq. We believe this acceleration will drive upside to (analysts') consensus (earnings) estimates."

Netflix returned to the portfolio after being sold. Its EPS rose 50%, 71%, 114% and 567% in the past four quarters.

Netflix is facing increasing competition from Hulu and stocks like Amazon.com (AMZN) and YouTube-owner Google (GOOGL) — both also owned by MainStay Large Cap Growth. Netflix's drivers are its original programming and global expansion, Burton says.

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